Building competitive moats in VC at Lerer Hippeau with Ben Lerer and Graham Brown

0:00Welcome back to another episode of Venture Unlocked, the podcast that takes you behind the scenes of the business of venture capital. I'm your host, Samir Kaji, and on this week's show, we're excited to have Ben Lear and Graham Brown, managing partners at Lear Hippo. Lear was founded in 2010 in New York to back early-stage entrepreneurs. Today, the firm manages over$1.2 billion and has invested in over 400 companies, including Oscar, BuzzFeed, Mirror, Warby Parker, and Casper. Before becoming a full-time venture capitalist, Ben was a founder and the CEO of Thrillist, while Graham joined Lear Hippo in 2015 from SoftBank.

0:33During our chat, we talked about the origin story of Lear, how they've evolved over the last decade, and the things they've had to do to maintain their competitive edge. I think you'll really enjoy the conversation, so let's get right to it. This episode is being brought to you by Grasshopper Bank. Privately owned and headquartered in New York City, Grasshopper Bank is built to serve the business and innovation economy. As a client-first digital bank, Grasshopper combines technology and years of industry expertise to provide clients with a best-in-class banking experience. Grasshopper's digital solutions are tailored for venture capital and private equity firms, startups, and small businesses.

1:10In addition, they also work closely with fintech-focused banking-as-a-service and commercial API banking platforms. Serving clients globally, Grasshopper provides flexible, firm-focused lending solutions as well as dedicated relationship managers committed to meeting the unique needs of funds and companies alike. Grasshopper is a member of the FDIC and an equal housing lender. For more information, visit the bank's website at www.grasshopper.bank or follow on LinkedIn and Twitter. Samir Khadji is the CEO and co-founder of Allocate. Allocate and Venture Unlock are independent of each other. Any statements or references made by Samir or his guests regarding third parties, investments, or securities are solely their views and opinions and are not intended as investment advice or an endorsement of such parties or securities by Samir, his guests, or Allocate.

2:01Allocate or its clients may maintain relationships with or investment positions in guests, third parties, or securities mentioned in this podcast. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Guys, it's so great to have you on the show. Thanks for coming on. Thanks for having us. Thanks for having us, Samir. I want to go back. And I think a good starting point for this conversation is going back to 2010. Ben, I was listening to actually an older podcast you did, and you said something around why people should start companies.

2:32And I think it went something along the lines is, only start a company when you need to start a company. And I thought that was a good sort of quote. And I want you to unpack that. And also maybe tailor that to why did you start Lear in 2010? Why did you have to do that? maybe unpacking that not in the context of of lure hippo but in the in the context of being a founder and and i don't think that i'm the person who created that statement but i think basically what that means is understand you know having built something myself i can personally attest to how hard it is and how much you have to put in to build a successful business i think from the outside the way that the press sort of glamorizes startups or glamorizes, you know, these great companies are overnight successes 10 years later, 15 years later.

3:22And the, the hardships that people have to go through to build really good companies are very real. Even, even fairy tale stories have a lot of dark moments in them. And I think if you start a company because you are drawn to the idea of being a founder or the, you know, you think it's exciting or you think it's a way to get rich or you think it's a way to be the boss or a bunch of whatever, you're starting it for the wrong reasons and you are probably going to be very unpleasantly surprised with some of the sacrifices that you're going to need to make. And so that comment is really about starting with the right expectations that this is going to get pretty close to killing you and probably won't work.

4:11Why subject yourself to the horrors unless it is something that you absolutely can't not do? Yeah, and it speaks a little bit to the resiliency you need to have as a founder. And you are going to go through those peaks and valleys. And those valleys, if you're not passionate about what you do and why you're doing it, it's going to be really tough to navigate through those. It's really tough even if you are really passionate. I think that's sort of the point is like, it's tough no matter what. So you have to be, you just have to be so all in or the hard times are probably going to prove to be too hard.

4:50Yeah. And I think this actually does tie back to even starting a venture fund. So many people have started venture funds. We were talking about this right before the podcast of over 2000 firms being founded since the global financial crisis, a lot of seed funds. You started right after there too. But when you start a firm, you're actually starting a company and it's not two or three or four or five years. It could be 17, 20, 25 years. A single fund may last 14 years. So you have to be passionate and you have to understand why you're doing it. So I want to go back. What did you see maybe as the gap and the opportunity back in 2010 when you were at the realist and then decided, hey, let's launch a firm.

5:32In fairness, I really don't think I knew what I was getting myself into. You know, this was the Lira Hippo one. It was at that point, it was called Lira Ventures when we did our first fund. It was a hobby. I mean, the idea was I was operating and building a company and we did see an opportunity to do something that we thought was going to be interesting and fun and lucrative and, and, you know, worth doing. But I definitely wasn't launching the fund and saying, this is what I'm going to do for the next 25 or 40 year, you know, whatever number of years in my life, it was a secondary pursuit and a sort of creative outlet and a way to invest into the ecosystem that I myself was a part of as a founder.

6:16And I think over the years, it became clear that what started as a hobby became something that was a lot more than that. But admittedly, I didn't come in the way that I would tell people to come into something. I, you know, I sort of fell into it, you know, for a long time. as I was continuing to build my company and the fund, it remained this creative outlet even as we were scaling. And it got very serious and we built a big team, but it didn't carry, you know, I think it's very easy to get someone's personal self-worth and their career intermingled in sometimes really unhealthy ways. And I've certainly had a tendency to get caught up in that over the years.

7:00And the way that my brain worked and the way that I was able to sort of, you know, compartmentalize things, I, I associated a lot of that anxiety and stress with my operating and Lira Hippo remained this sort of escape and this place where I got to do these, these sort of meet these interesting people and be associated with these cool companies and help in ways that I didn't get to do on the day-to-day basis in my, in my operating job. And so it was this sort of like beautiful thing. And the market was broadly, I mean, of course there was, you know, moments of correction and there were harder and easier cycles, but it was generally an up into the right market for 10 or 11 years.

7:43And I do think that now meeting the realities of, you know, the rubber meets the road in terms of our correction in the market, you know, probably too much capital in the asset class. This is a moment where I think a lot of managers are going to need to sort of look themselves in the mirror and have that like, oh boy, is this really what I signed up for? Like, I thought that this was not the same way that I would say to you that I think founders can do a business school project and think this sounds really fun and cool. And it turns out that it's a lot more than that. I think that that moment is emerging for a lot of managers who are going, I thought this was like, this was a cool form of pseudo retirement after my successful career beforehand.

8:25And to win in this market is, you have to work so hard. I mean, this is just, this is hard right now. This is hard. This is, you know, you're getting the crap kicked out of you every day as a VC right now. I would never as hard as a founder, but this is tough. And I think that it'll be interesting to see how many folks that came into this hobby style or low conviction are going to decide that it's not worth waiting around and that this is not what they thought they signed up for. And I do want to double click on that a little bit later in this conversation in terms of what we have seen, where the market is.

9:04Venture, as a lot of people that have been in the industry for a long time. No, it's a long, long feedback cycle filled with false positives and negatives, especially in short timeframes. And we have come off this incredible period of economic prosperity because interest rates were low. There was a lot of money sloshing around, things have changed. And we'll come back to that. But going back to, you started as essentially like a hobby and realized that, hey, there's something real here. You bring on Eric. And now, as part of building a firm, you're institutionalizing how you do things, you're bringing on a team, and you're building a certain cultural ethos around what does Lear Hippo actually stand for for founders.

9:46And Graham, you joined in 2015. I'd love to hear maybe for somebody looking on the outside at that point, Lear Hippo being five years old, what really drew you to the culture of Lear? Maybe I'll frame it a little bit in what I was doing. I actually started in the mid on the investing side in the middle of GFC in growth equity and was in New York, made my way to New York, was in New York working for SoftBank at the time when I got to know the Larry Hebbels. And so I actually started with a later stage focus, highly thematic learning curve and worked my way earlier and then got to know Larry Hebbels closely while I was at SoftBank Capital.

10:30Eric Hibba was actually one of the founders of SoftBank Capital Investment in the U.S. back in the 90s. And so there was a very close tie between the two firms. And in thinking about an opportunity and sort of where I was in my career, it's really three things. One, the people. You know, most important, like, do I want to come to work and learn from these people, work with these people, trade ideas with these people and spend, you know, my professional lives with these people. So thinking about sort of like a long-term decision, it's about the strategy and the insight and the sort of competitive advantage.

11:06And with where Ben, Eric and Kenny started the fund in the bet on New York and the bet on an institutional class that focused on being founder aligned and partnering at the very earliest stage was just like a really, really unique position to be in. and New York was growing very, very rapidly from where it started. And so just the sheer opportunity of what could be built was very, very attractive. And then I think just sort of thinking about personal growth, long-term, where I wanted to be, what gave me energy, being at that earliest stage, being part of what could be a really cornerstone brand and investing in New York for the long run was really, really exciting.

11:53And sort of the path of like a ton of success in the first four funds. And then I joined when we raised Fund 5, pulling together sort of the first fund where like, let's do the math on what we want this fund to look like exactly. And how many companies is right for the diversified strategy we want? What should our ownership be? Sort of like that build phase coming in with people that in a culture that love to be a part of a strategy that I thought was winning in a competitive advantage that I thought would win. And then the ability to build was just like the perfect world for me with where I was in my career.

12:28And so it was at the time, you know, it's never an easy decision in the moment, but like looking back on it was like such an easy and obvious decision for me. So when you look back then, this is a question for both of you, as you think about evolution of the industry, which has changed so dramatically. No longer this monolithic industry, so many funds, sector, niche, geographies, things like that. New York was a great opportunity because you started so early on in the New York tech scene. But over time, the arbitrage opportunity just to show up starts to go away as more funders come in, more VCs, more investors realize the opportunity that New York had and has continually.

13:11How did you evolve this concept of competitive edge? Graham, you said competitive edge, which I like it. We also think about comparative advantages, but over time as competition changes, you also have to evolve. So we'd love to think about how you guys have thought about staying competitive and actually creating this overall brand that allows you to win consistently. Our strategy, if we started today and said, let's go do early stage New York, that is not a particularly defensible strategy. The sort of moat that we've been able to build around our business is in large part a product of maybe being lucky in that we started and sort of planted a flag at the right moment as New York, the train left the station and we had a good seat on the train.

14:01The compounding effect of being consistent about the role that we've played in this ecosystem for over a decade now. And so we often say, and I think maybe I may have even mentioned this last time we were together, our community is our brand is our community. Over 400 companies that we've financed over the course of 12 years, more than half of them are New York-based. That is the largest community of New York-based founders that I think anyone has accumulated or put together. And that in and of itself becomes part of a competitive advantage that we become, You want to be a part of this community that roots you in this market, that gives you access to this network of founders, this network of talent.

14:42And I really do think that there's something about building a company. You have a job somewhere else and there's a format or a structure. You're sort of a part of a system. When you start a company, you are at sea. You are alone building something and it's this self-motivated, self-policing, very nebulous thing. And I think being part of a community that is tailor-made to work with and help companies from zero to one is really valuable and grounding. And by the way, something that when I started my company didn't exist here and I had to sort of knit together by banding together with other founders and friends and trying to create a sense of community in a market that didn't really have one yet.

15:30I think that that is a competitive advantage. Good deals beget good deal flow. We've seen this time and time again. We've been fortunate to... I've been early in a lot of companies that are successful and important and category leading in various industries. By the way, in a lot of different industries, because we've done this for a really long time now and have a vast portfolio and have, I don't know, 20 or so companies that we were the first money into that have at least paper billion dollar companies. And you want to be a part of this community, I think. And you want to work with the funds who have worked with the companies that you look up to.

16:03A lot of this is a people business. The way that we find deals is often through referrals from our founders, from folks leaving portfolio companies that we were early in. It's an organic thing that happens. And there's no substitute for the work that's been done and the time and experience that we've put into building a platform here. That's one answer. The other answer, instead of getting a short answer, you have the longest answer in my life. The other part of the answer is we have to continue to get better, actually. And so not just say, hey, we've been here for a long time. We're going to keep doing the same thing as we've always done it.

16:38But how do we deliver a higher and higher level of service to the founders that we work with? How do we give better information and advice that starts with everything from even in the last year, fully reconstructing the way that we onboard a company after we invest in it and the way that we set up, the way that we help them sort of put the right infrastructure in place around org planning, around how they think about their compensation philosophy, how they think about their mission and vision values, how we construct a financial model with them working backwards from their next round of financing, not just using the old$1 million of ARR gets me to an A, but taking into account the ever-changing nuances of the funding landscape, how we work with companies around getting them to commit to transparency in how they report results, not only for us, but for them so that they build a culture of sort of self-awareness in early stages that over the course of a decade, We've seen a bifurcation where companies who report a certain way and are eyes wide open around business performance in a certain way drive different outcomes than founders who good news travels fast, bad news travels, not at all.

18:01You take the learnings of doing this for a long time and hone the model by which we engage with founders and help them. And this is a long game. And then over time, you do the right work with founders again and again and again and again. You show up and you help and you are founder first genuinely. And it all sounds very cliche on an individual company basis. But when you do it for a really long time with genuine consistency, you build a reputation and a brand. And then that reputation and brand becomes part of the value of what you bring and it gives you the right to win. And so we feel like we've done that and we're getting better and we need to continue to get better.

18:45You mentioned two dimensions. One is how do you help companies in really specific ways? And we've seen the rise of the platformization of venture funds, somebody that helps with talent, financing, adding people that have very specific skill sets that can drive a company in different ways during that zero to one, maybe even one to two phase. And then there's the community aspect, which is everybody gets to meet each other, they learn from each other. And that, of course, over time requires a level of consistency of what you're offering. and you're almost productizing these things. I hear this a lot.

19:22And I always like to ask the question of what does this mean in practice? How do you create that consistent framework? What does it mean to productize that community? If the team invested in very early, even prior to my joining, I think we've evolved and honed. And I think you said it well, productized the things that we can to give it individual team members who are focused on the platform side and in supporting the founders from going to zero to one, any and all unfair advantages that we can. The community one's easy, right? We've tried every different platform. An email, listserv, that is searchable and archivable continues to be the place everyone returns to, ranging from small tactical questions and info sharing to bigger strategic things that they're looking for.

20:16you know, someone who looks more like them in terms of where they are in stage and industry. And, and so like, it's, it's a wide range that, that exists there and it continues to build. Our operating partner, Stephanie is incredible organizer and pulling together community. And we will do community events based on cohorts and strategy and things where people can really share learnings and talk about the things that are very current and top of mind for them, not just CEOs, but CTOs, go-to-market leaders, really sort of runs the full range. And we'll do close to an event a week. And so there's constant content and communication and connection that keeps communities amazing.

21:02And it's like the most important thing, as Brad mentioned, our brand is communities. That is so key. We have to continue to invest in it. And we are constantly investing in that connectivity. Some of the other key things you think about, like when you're starting a company and going to series A that you need to think about that maybe is not your superpower. These are all things that we've invested in that every company will need and that where we know we can help. Talent and recruiting, including how you sort of set yourself up for long-term. And then communication, storytelling, and go-to-market and how you hone that and do that really well.

21:42Those are the sort of key areas that we've invested in, continue to invest in for our founders. And we have incredible people that lead both those. In addition to, we productize some of this. We've built a jobs marketplace that effectively functions as a double opt-in connection where we can funnel talent and the hundreds of people that we meet and that come inbound to us that we think are really good. And we can connect them with our portfolio companies in automated fashion. And so it's sort of like you learn by doing, and then you productize what you can to continue to scale. And now having done it for over eight years, we're, we're, we're really figuring out the points of leverage and we're going to continue to do more, but it's something that's been just invested in over time and, you know, pays back in huge ways.

22:28And, and, but one thing I would also add to this is I think a lot of the, the value that a fund provides, it needs to match up with expectation and reality. It's very easy to promise the world to companies and say, oh my God, we'll do everything for you. We'll hire all your devs. We'll do you. And there's a natural tendency for funds to make big promises, particularly when they're chasing a deal and want to win a deal. I think the really important thing is be clear about where you're going to engage and how you're going to engage and where you're not. And so we've, I think very clearly sort of landed on an operating model where we work with companies broadly around what we call the big moments.

23:09So we create all these community opportunities and all these learning opportunities for, you know, founders to learn from one another. And then where we really get involved is at these very big moments. And so we're not going to employ a large team of recruiters here to try to hire your 6 PM. We're going to work. We're going to try to help you learn to help yourself. I mean, this is like the proverbial teach a man to fish kind of thing. If you look back historically, the best companies are not ones that are constantly asking for tons and tons of help from their investors to do their jobs for them.

23:45I mean, our job as early stage funders is to find people who we think are going to be self-sufficient, competent leaders. We're not building a platform to do dirty work for people. We're learning, we're building a platform that creates some opportunities for us to get involved at very high impact moments around the moment of the pivot, the moment of the next round of fundraising, the moment of the co-founder hire, the moment of the decision around, are we selling, you know, top down or bottoms up? Like really, really, really important moments where the partner and some of the sort of operational leaders on the team roll up sleeves and get involved with you.

24:22But otherwise, we're going to create a framework for you to be more self-sufficient and build your own company because your early stage venture fund and frankly, any venture fund should not be responsible for making a company successful. The company is going to ultimately be successful if they take responsibility for themselves. And setting that expectation early is really important. And by the way, that may mean that, you know, one in 10 or one in 20 or one in 100 founders may say, well, this other fund is going to give me, they're going to put a full-time recruiter in my office. And if that's the thing that they want, like that's great for them.

24:56And like, we're not going to be the fit for that. But I think most of the best founders, they want the accountability to build their business for themselves. Yeah, I love the framework. And when you think about NPS or satisfaction, it is this delta between expectation and reality. And we have seen so many people in the want to win a deal, just offer the world and then just can't execute on it. And then ultimately over time, that brand diminishes and you don't get the benefit of the founders referring you to other founders. And it is really important. And I'm glad you brought that up because we have seen so many of the memes out there of how can I be helpful?

25:37And it's always been around promising all these things and delivering on a very small percentage. So when you think about all of the things you're doing, which is very productized, plus, you know, matching expectation reality, you have to do those things, especially as your portfolio size gets bigger and bigger. And of course, you're playing the biggest role at that zero to one, maybe one to two, and maybe even beyond that for some founders that you maintain those relationships, even as they scale. And, you know, when you think about that portfolio size, I wanted to come back to that. Graham, I think you mentioned this earlier.

26:10You know, I thought the portfolio model in terms of diversification made sense. Talk to us a little bit about what is your model around the number of companies? What did you examine to really land at that? This is sort of on the sort of virtuous cycle and things take time and credibility takes time and you need to earn the right to win being a big part of how you build a successful brand in any category. And, you know, the roots were winning an allocation. And then you earn the right to lead or co-lead. And then you earn the right to be the first call to lead, to decide what's the right ownership and work with the founder to pull together the rest of the investors.

26:56And those all take time and it's something we've thought about and invested in um over many years in the in the early days in fund one very small fund where we're just winning allocation we might have had 65 70 companies starting with fund five where we where we really switch from our core focus leading or co-leading it was like four i think four five four was probably the Look, Graham wants full credit. Graham's like, I got here for five, and then we're able to win full allocation and whatever we want. Take it easy. Okay. You really, it's really despicable behavior here. So where we are in it, we think about sort of 45 core positions where we're going to own between 10 % and 15 % with that first check.

27:48We're always going to be collaborative. We want to work a huge amount of what we see and how we partner with our co-investors. And so we still have a core focus on collaboration and how we think about keeping fund size to the right number. We're able to do that and still have a shot of any single one of those 45 companies being able to return their fund or more if it's a breakout. We think a lot about diversification across industries, maintaining significant ownership from the start. That first check is where we're going to buy the majority of our ownership in any investment. And then obviously deploying follow-on capital as those companies progress.